1998 Was A Tough Year For Biotech Financing

According to Burrill & Co. (San Francisco, CA), a private merchant bank specializing in biotechnology, the biotech industry in the United States raised a total of $4.0 billion in financing during 1998, a decrease of 44% compared to 1997 ($7.1 billion). Initial public offerings (IPOs), of which 14 were completed, accounted for $371 million compared to $709 million (27 IPOs) for 1997. Disclosed figures in upfront and milestone payments for strategic alliances totaled an additional $6.2 billion, an increase of 5% from 1997 ($5.9 billion).

In the fourth quarter 1998, the biotechnology industry raised $0.9 billion in financing, compared to $0.6 billion for the third quarter 1998 and $2.4 billion for the fourth quarter 1997. In the fourth quarter 1998, only one public offering occurred, raising $17 million, while partnering activities accounted for $1.4 billion.

"The capital markets for biotech companies virtually dried up during the last half of '98, with the moneys raised in 1998 approximating only half that raised in 1997," noted G. Steven Burrill, CEO of Burrill & Co. "Many companies are quietly waiting out the storm and looking for the upturn in 1999. However, investors are not convinced that biotech is the industry to be in at the moment, except for those large market cap biotech companies with products and profits. We exist in a competitive capital marketplace, and the Internet is where the action is today," said Burrill. "Biotech's long-term, high risk, high reward potential is less exciting to these investors today than it was during the first half of this decade."

The Biotech Industry In 1998

According to Burrill's analysis, the biotech industry lost approximately 40% of its market capitalization during the summer of '98, but regained it late in the year. At calendar year-end, total industry aggregate market capitalization stood at approximately $150 billion, up from $120 billion a year earlier (late summer, market capitalization was less than $100 billion). The top 20 biotech companies account for approximately two-thirds of the total biotech industry market capitalization at year-end. On the other end of the spectrum, more than two-thirds of the industry's 365 public companies have market capitalizations of less than $100 million, many of which are trading at only a small premium to cash value per share. Clearly, the capital markets are discriminating between the more profitable companies and the smaller ones.

In 1998, the Food and Drug Administration (FDA) approved 14 biotech drugs, including COR Therapeutics' Integrilin, Immunex's Enbrel, Herceptin from Genentech and most recently Provigil from Cephalon. Although in some cases these approved medicines are addressing blockbuster markets, the sales growth observed to date has been less than the companies and Wall Street expected.

The massive impact from the pharmaceutical industry mega merger trend continues to ripple throughout the biotechnology industry. The most recently announced mergers of Hoechst with Rhone-Poulenc Rorer and Astra with Zeneca (and rumors of others) potentially will not only affect healthcare, but also the agbio, animal health and the chemical industry. "The merger trend in large pharma keeps decision makers distracted from signing partnering agreements with biotech companies," stated Burrill. "However, positive fall out from the merger activity will be the emergence of "spin outs," pieces of the merged companies spun out to form a new generation of entrepreneurial growth companies."

Over the past several years, the number of service-based or "enabling toolbox" companies has increased significantly, some of which are earnings based and have high valuations today. Yet, a consolidation trend is also emerging in this sector as potential customers (large pharma, agricultural and chemical companies) demand added value for each deal they sign and move towards more "one-stop shopping" for their discovery/development technology needs. As a technology largely developed and applied to human health solutions, the enabling toolbox has crossed over to other sectors of biotech, with a dramatic increase seen for applications in agbio and animal health.

The agbio sector has also seen rapid consolidation recently, such as AgrEvo's acquisition of part of Cargill Hybrid Seeds and Monsanto's purchase of DeKalb Genetics, Delta & Pine Land and Holden's Foundation Seeds, as the chemical industry races to develop second generation agbio products and moves away from traditional chemical-based products. Many agricultural companies have already added a biotechnology aspect to their toolbox, as the need to augment their pipelines is driving further consolidation. Advancements in genomics, bioinformatics and a better understanding of the plant cell cycle are all factors that will play a vital role in the development of the new agbio products.

Predictions For 1999

For 1999, Burrill & Co. predicts:

• A general improvement in the equity markets for biotechs. With the Asian economic crisis lessening and a general improvement in the world's equity markets, the markets for biotechs will similarly improve.
• Increased interest by the investment community in Europe in equities (in general) and biotechnology specifically will add dramatically to biotech companys' abilities to assess their capital needs. Large capitalization biotech stocks have led the recovery to date. Smaller capitalization stocks (which have been hurt more) should now recover as more investors return to small capitalization stocks where values are disproportionately low
• Product approvals and product market success will drive earnings and company success and the markets will react favorably.
• Venture capital interest will return as values become more apparent and liquidity re-emerges. Selected acquisitions of biotechs will provide evidence of the company's inherent values.
• Improved regulatory success from changes made during the last several years increasing both the predictability and rapidity of approval. An increased number of product approvals are expected for 1999. Products expected to be approved include Coulter's Bexxar for non-Hodgkin's lymphoma, Centocor's Remicade for rheumatoid arthritis, Biota/Glaxo Wellcome's new agent for influenza, Relenza, and Genentech/Alkermes' depot formulation of human growth hormone, Nutropin Depot.
• Industry consolidation will continue, with increases in the biotech to biotech merger arena, but reduced big pharma/biotech consolidation because partnering will play a more important role.
• Partnering between big and small companies increasing in both number and size as large pharma/agricultural companies will increasingly access innovation from the smaller companies.
• Internationalization of biotech will continue, with more cross border deals, more cross border financing and more broad based developments worldwide.
• Genomics will continue to drive industry restructuring as the breadth of genomic knowledge, understanding of disease pathways, bioinformatics and more sophisticated tools revolutionizes agriculture and human health.
• Agbio, animal health and nutraceuticals will increase in importance as the industry again transforms itself (no longer a biotech industry just focused on human healthcare therapeutics and diagnostics).
• Genetics in the food chain and bioethics will become a bigger issue in 1999 as consumer awareness increases and human cloning experiments continue to "push the envelope." Improving the inputs/outputs of agriculture should have less emotion than the "human engineering" dialogue, but both will become bigger issues.

Fourth Quarter '98 Alliances/Acquisitions

In addition to large pharma merger activity, the biotech sector also showed steady consolidation activity. In a stock-for-stock acquisition, ALZA agreed to purchase all outstanding shares of Sequus in a deal valued at $580 million. Megabios and GeneMedicine decided to merge in a stock swap transaction valued at $38 million. Watson Pharmaceuticals announced plans to purchase Theratech for $300 million in stock and is looking to increase its US presence; SykePharma intends to acquire DepoTech for approximately $31 million; and Anergen is being acquired by Corixa for $9 million.

Major Alliances/Acquisition News This Quarter Includes:

• In an estimated $54 million agreement, Targeted Genetics entered into a collaboration with Medeva for the development and commercialization of its gene therapy for cystic fibrosis (CF), tgAAV-CF. Targeted Genetics will manage the Phase I trials conducted in the US, with Medeva responsible for all other trials.
• CuraGen and Glaxo Wellcome signed a five year pharmacogenomics deal potentially worth $48 million. CuraGen will receive $2.75 million each year with additional payments and royalties on any products that emerge from the collaboration.
• In a multi-year deal, Incyte announced a collaboration with Zeneca in the field of agrigenomics. Incyte will apply is gene sequencing and bioinformatics capabilities to crop plants designated by Zeneca. Zeneca will also have access to Incyte's PhotoSeq database.
• In an agreement potentially worth $132 million, Coulter Pharmaceutical and SmithKline Beecham agreed to jointly commercialize Coulter's lead product, Bexxar, to treat non-Hodgkin's lymphoma.
• SmithKline Beecham and Corixa Corp. entered into an expansion of their 1995 tuberculosis vaccine collaboration, potentially worth $200 million. The companies are now seeking antigen discoveries in several indications, including atherosclerosis and sexually transmitted diseases.
• In a five-year collaboration worth $60 million, Pharmacopeia and Schering-Plough agreed to jointly design libraries, and identify and optimize lead compounds against therapeutic targets. In addition, Pharmacopeia signed another deal, potentially worth $64 million, with Schering AG to screen its multi-million compound sample collection of small molecule targets.
• In December, Cell Genesys signed an agreement with Japan Tobacco for its GVAX cancer vaccine technology. Initially, the agreement covers rights to GVAX in prostate cancer and one undisclosed target, and is potentially worth up to $153 million.
• Axys has entered an $80 million agreement with Rhone-Poulenc Rorer for the development of small molecules that inhibit cathepsin S. This enzyme has been implicated in several inflammatory diseases, including rheumatoid arthritis, asthma, atherosclerosis and certain autoimmune diseases.
• A second cancer collaboration, potentially worth $90 million, was signed between ImClone Systems and Merck KGaA. The agreement covers development and commercialization of C225, a monoclonal antibody against epidermal growth factor receptor.
• Lynx Therapeutics signed a five-year deal with DuPont, potentially worth $60 million, to research crop genomics and develop genomic maps of crops.
• In November, Medarex signed its ninth partner, Novartis, for its HuMAb Mouse technology. Novartis agreed to pay $50 million, plus royalties, for use of the human monoclonal antibody technology to produce high-affinity, fully human antibodies for an unlimited number of targets over the next ten years.
• Two alliances were announced by OraVax, the first, a merger with Peptide Therapeutics for $15 million. The newly formed company will have six products in clinical trials and four ready to enter trials in the next year. The second alliance, with Pasteur Merieux Connaught, is to develop a vaccine to prevent dengue fever. The potential value of the collaboration is $23.5 million.
• In October, ICOS announced a joint venture with Eli Lilly & Co. to develop and market phosphodiesterase type 5 (PDE5) inhibitor as an oral treatment of sexual dysfunction in both men and women. Lilly will contribute $75 million up front as part of the collaboration.
• The Quarter's Product News Significant product news this quarter included: GelTex received approval from the FDA for Renagel, a non-absorbed polymer-based phosphate binder for patients with end-stage renal disease. FDA approval triggered a $15 million milestone payment from partner Genzyme.
• Positive interim data were announced by Centocor from a Phase III trial of Remicade for patients with rheumatoid arthritis (RA). Patients showed significant improvement in RA symptoms during the 30-week trial. The drug is already marketed for Crohn's disease.
• The FDA granted approval to Immunex for Enbrel, the first biologic product for use against rheumatoid arthritis (RA). The Company agreed to strict guidelines set by the FDA that would make the drug available following approval due to high demand. The drug will be marketed by Wyeth-Ayerst.
• In late December, Cephalon was granted marketing approval for Provigil (modafinil) from the FDA to improve wakefulness in patients with excessive daytime sleepiness associated with narcolepsy.
• In December, Aastrom Biosciences obtained CE Mark approval for the AastromReplicell Cell Production System liquid products of the SC-I Therapy Kit to produce bone marrow cells for use in stem cell therapy.
• Coulter announced positive results of a Phase III trial with Bexxar in non-Hodgkins lymphoma patients. The Company has applied to the FDA for fast-track status.
• Genentech and Alkermes reported positive results of their Phase III study of Nutropin Depot (recombinant human growth hormone) and plan to submit a new drug application (NDA) to the FDA in early 1999.
• In November, Inhale Therapeutic Systems and Pfizer began recruitment for Phase III trials to test systemic delivery of insulin through the lungs. The trial will be conducted at 117 sites throughout the US and Canada.
• Evacet, a liposomal formulation of the cancer drug doxorubicin, has been submitted for approval to the FDA by The Liposome Company as a first-line therapy for the treatment of metastatic breast cancer.
• BioChem Pharma received FDA approval for lamivudine (3TC) for treatment of chronic hepatitis B. The drug is already being marketed for the treatment of HIV.
• Neurobiological Technologies and its partner Merz reported positive data from a Phase III trial of the neuroprotectant, Memantine, which showed significant improvement in functional independence in patients with severe dementia.
• An advisory committee to the FDA unanimously recommended approval of DepoTech's anticancer agent, DepoCyt, as a treatment for lymphomatous meningitis.
• Aronex Pharmaceuticals filed its first NDA with the FDA for approval of Atragen, its liposomal injectable formulation of all-trans retinoic acid. Atragen is used to treat acute promyelocytic leukemia intravenously.
• On behalf of Biota Holdings, Glaxo Wellcome filed an NDA for the approval of Relenza, an inhaled influenza drug. Phase III trials of the drug showed Relenza reduced the severity and duration of symptoms up to 2.5 days faster than the placebo.
• An FDA advisory panel voted 10-1 to recommend approval of Cypress Bioscience's Prosorba, for the treatment of moderate to severe rheumatoid arthritis patients who have failed other therapies.
• Amylin Pharmaceuticals disclosed results from European and Canadian Phase III studies of its diabetes drug, pramlintide, which failed to show statistical significance. The news sent Amylin stock plummeting 77%. However, the Company is continuing with the two Phase III trials in progress in the United States.

Other News of Note

During the quarter, scientists reported the complete sequence of the genome for the nematode C. elegans. This is the first genome sequence of a multicellular organism. For biotechnology companies, C. elegans provides an excellent model for the human system.

Since the cloning of Dolly, ethical debates among scientists have been ignited regarding the cloning of human embryonic cells. The debate was further fueled this quarter following the announcement of human cell cloning by Korean scientists. Currently there is no governing body regulating research of human embryonic cells and it has been suggested that the National Bioethics Advisory Commission provide input on an appropriate regulatory framework.

For more information: Steven Burrill, CEO, Burrill & Co., 120 Montgomery St., Suite 1370, San Francisco, CA 94104. Tel: 415-743-3160.